DUBLIN (Dow Jones)--Irish banks face D-Day on Tuesday when the government reveals both its plans for additional recapitalization and the discount on the first tranche of loans being transferred to the nation's "bad bank."

Ireland's banks were particularly hard hit by the global financial crisis, and by a collapse in the property market. The banks had made big loans to property developers, and many of those loans are unlikely to be repaid. At 1315 GMT, Allied Irish Banks PLC (AIB) slumped 18% to EUR1.39 in Dublin amid fears that it will slide into state ownership, while Bank of Ireland PLC (IRE) fell 8.4% to EUR1.27 as the state prepares take more equity in the bank.

Finance Minister Brian Lenihan will tell the Irish Parliament after the market closes Tuesday how much more Allied Irish Banks and Bank of Ireland will need to help stabilize them in the wake of a raft of bad debts.

Most economists say the minister will set out a EUR16 billion recapitalization target for the country's major financial institutions, which could also include nationalizing Irish Nationwide and EBS Building Societies.

"This is the big one," said Goodbody Stockbrokers analyst Eamonn Hughes, "when we find out about National Asset Management Agency haircuts, target capital levels and levels of state ownership." Also Tuesday, the National Treasury Management Agency will detail the discounts or "haircut" on the first tranche of property and development loans being transferred to the National Asset Management Agency or "bad bank." The broker forecasts a 35% discount on the first EUR2 billion of an estimated EUR12 billion being transferred by Bank of Ireland to NAMA and sees a 30% discount overall on the total amount of loans being transferred.

Goodbody sees a bigger 35% discount given to Allied Irish Banks on its initial EUR3 billion transfer to NAMA and estimates a 40% haircut overall on the EUR23 billion of loans being bought by the bad bank.

The broker also said Allied Irish Banks will need between EUR4.7 billion to EUR4.8 billion in equity if it doesn't sell assets, while Bank of Ireland will need around EUR3 billion to reach a 7.0% core equity ratio target.

Allied Irish Banks has said it is considering all options to raise capital, including assets or business sales, rights issue, debt exchange or--as a last resort--going back to the government for a capital injection. Among its holdings, AIB acquired a 23.2% stake in the U.S. M&T Bank Corp. after its 2003 merger with AIB's U.S. Allfirst unit and has a 70.5% share in Poland's Bank Zachodni/WBK. AIB has said Poland is the "jewel" in the bank's portfolio. Bank of Ireland said in February it was exploring "a range of options" to raise capital. "These options include access to the private capital markets," it said.

Most observers say the state will end up with a 40%-plus stake in Bank of Ireland and 70%-plus stake in AIB, but Lenihan is expected to set his targets for end-2010, which will help give the banks time to sell assets or property. The government has already recapitalized Allied Irish Banks and Bank of Ireland by EUR3.5 billion, respectively, in return for an effective 25% stake in each bank--which it can convert into ordinary shares--but it has thus far resisted nationalizing the banks.

Last month, the state also took an additional 15.7% stake in Bank of Ireland. It was taken in the form of around 184 million shares in lieu of the annual EUR250 million dividend due on the state's EUR3.5 billion recapitalization.

On Wednesday, Bank of Ireland will announce its results for the nine months to Dec. 31, 2009, and the nationalized Anglo Irish Bank Corp. will report 2009 results. Anglo is expected to detail losses of EUR12 billion to EUR15 billion. Anglo Irish Bank Chief Executive Officer Mike Aynsley has said his bank will need around EUR9 billion of state investment to keep the bank afloat and said that liquidating the bank would cost over double that. Ahead of Anglo's results, Irish police earlier this month arrested and released without charge Anglo's former chairman, Sean FitzPatrick, and former finance director Willie McAteer over alleged financial irregularities at the bank. Ireland's director of corporate enforcement is also probing transactions at Anglo, in particular EUR451 million the bank lent to 10 "long-standing clients" to buy shares in the Anglo, only a small portion of which has been repaid. The government nationalized Anglo in January 2009 to prevent its failure after it lent aggressively to developers before the country's housing market collapsed. Many of those loans are unlikely to be repaid. Mortgage lender and life insurer Irish Life & Permanent PLC (IL0.DB) temporarily placed around EUR7 billion in deposits with Anglo in September 2008, EUR4 billion of which was on Sept. 30, before Anglo's year-end results. IL&P later apologized for the transfers. The mortgage lender won't be taking part in the government's recapitalization program or NAMA as it mostly lent to mortgage customers--not big developers. NCB Stockbrokers analyst Ciaran Callaghan said all eyes will be on the minister's recapitalization speech Tuesday evening. "Tomorrow is shaping up to be a defining day in the history of the Irish banking sector," he said. Company Web sites: http://www.bankofireland.com,http://www.aib.ie -By Quentin Fottrell, Dow Jones Newswires; +353-1-676-2189; quentin.fottrell@dowjones.com (END) Dow Jones NewswiresMarch 29, 2010 09:30 ET (13:30 GMT)

"Speculation that haircuts will be severe and that the regulator will opt for stringent capital requirements has reached fever pitch," said Davy analyst Emer Lang in a note to clients.

Lang said a big capital injection from the government would "clearly be an unwelcome development" since the bank has been pushing for a solution that would avoid government control.

"Asset disposals could in theory satisfy much of this with a strategic investor and/or existing shareholders providing the rest, but today's reports suggest that AIB may not be given the time to pursue this option," Lang said.

Davy is expecting that AIB would need around 5 billion euros of equity if assets transferred to NAMA are sold at a 35% discount.

For Bank of Ireland the broker estimates it would be around 2.7 billion euros of capital if the haircut applied to loan sales was 27%.

March 29 (Bloomberg) -- Allied Irish Banks Plc fell the most in five months in Dublin trading on concern the government will take a majority stake in the lender as surging real-estate bad debts eat into its capital.

Finance Minister Brian Lenihan will lay out his plan for the financial system tomorrow as the governmentâs so-called bad bank begins taking over toxic loans from lenders. The transfers will deplete the lendersâ capital and may force the government to inject cash into them. The state may get a 70 percent stake in Allied Irish, newspapers including the Irish Times reported.

A majority shareholding for Allied Irish âwould clearly be an unwelcome development for existing shareholders and stands in stark contrast to managementâs preferred self-help strategy aimed at avoiding government control,â said Emer Lang, an analyst at Davy, a Dublin-based securities firm.

Unravel

The bad bank, the National Asset Management Agency, will buy the loans at a discount. After the transfers take place and the banks get new capital requirements, Allied Irish and Bank of Ireland may need a combined 7.7 billion euros ($10.4 billion), Davy estimated, adding to the 7 billion euros the state has already invested.

Irelandâs banking system began to unravel two years ago after the economy entered a recession and the real-estate market collapsed. Property values have fallen by half from a peak in 2007 and soaring bad debts threaten to topple the banks. The asset agency aims to turn the situation around by purging lenders of toxic loans.

The agency is buying loans with a book value of 80 billion euros ($108 billion), about half the size of the Irish economy. The discounts on the loans will eat into banksâ capital as the countryâs financial regulator, Matthew Elderfield, sets out the new buffers they should have. Allied Irish said it will âupdate the marketâ on capital once discussions with the regulator finish.

Irish lender EBS Building Society has been granted a derogation until May 31 of its requirement to have a minimum Core Tier 1 capital ratio of 4 percent, it said today. The exemption is due to its transfer of assets to the bad bank before the government recapitalizes the lender.

AIB had an equity core tier 1 capital ratio of 5 percent at the end of 2009. Bank of Ireland had a 6.6 percent ratio on Sept. 30. Those ratios exclude the government investment of 3.5 billion euros in each bank, made at the start of 2009.

Allied Irish Banks, the country's biggest bank, is fighting tooth and nail this weekend to avoid ending up in majority state ownership, the Irish Independent has learned.

Ireland's banks are engaged in crunch negotiations with the Department of Finance as to how many billions of euro they need to raise to absorb massive loan losses and hit the new regulatory targets for the amount of capital they must hold.

Assets

The banks have to provide the new financial watchdog chief, Matthew Elderfield, with convincing evidence of how much they will be able to raise privately either by selling assets or going cap-in-hand to their shareholders. Any shortfall will be made up by state capital.

As a result, Finance Minister Brian Lenihan will announce on Tuesday that the Government is preparing to take a significant majority stake in AIB. It is likely to end up with a holding of around 40pc in Bank of Ireland after it completes an anticipated â¬1bn-plus rights issue.

Analysts believe AIB needs to raise at least â¬4bn and BoI requires a further â¬2.5bn. The aim is to ensure they have enough cash in reserve to absorb discounts associated with NAMA, as well as further massive loan losses coming down the tracks.

Discounts being put on the first batch of risky property loans bound for NAMA are running much higher than the 30pc average estimated by Mr Lenihan last September.

Extensive details of the finances of Ireland's banks and building societies are to be revealed on Tuesday when Mr Lenihan stands before the Dail to make a watershed announcement on the future of the Irish banking system.

Mr Lenihan's 'Super Tuesday' announcement will also include:

* The unveiling of long-awaited legislation merging the Financial Regulator with the Central Bank.
* The flagging of new rules allowing authorities to seize control of a failing bank in future, and wind it down if necessary.
* The Government's plans to pump billions of 'rescue aid' into Anglo Irish Bank and Irish Nationwide.

Conversion

However, rather than go out and raise fresh money for AIB and BoI, the Government will look to convert a large chunk of its existing â¬3.5bn investment in the banks into actual ordinary shares.

It will result in a huge dilution of the banks' existing shareholders. However, analysts have said for some time that AIB's share price reflects the strong likelihood of the Government having to take a direct controlling stake in the bank.

The Government's tough stance comes as a blow to AIB's new boss Colm Doherty, who said earlier this month he would flog a host of valuable foreign assets before going to shareholders for cash. He signalled that the bank would only go back to the State for equity as a last resort.

A spokesperson for AIB said: "Discussions are ongoing. We couldn't comment at this stage."

The Department of Finance declined to comment.

BoI said it is prevented by market rules from making any market-moving statements ahead of posting figures next week.

Sources familiar with the process spoke last night of "very tense discussions" between the banks, the Department and the regulator's office over how much money all the banks need to raise.

"The talks are far from over. These are destined to go right down to the wire on Monday," said one observer.